Last year saw bitcoin star in more than its fair share of headlines. The cryptocurrency climbed in value all year, making news when it took a dive or traded high. Its overall value had an unprecedented growth of 61 times its 2013 opening value, ending at around $800 per coin. As one Forbes writer pointed out, if you had invested $100 at the beginning of the year into bitcoin, you would have had more than $5,000 by the end of the year. With all of the media attention, some may be interested in getting in on the action. Here are five bitcoin myths debunked to clear the air for potential investors.
1. Bitcoin is a currency
Bitcoin is not a valid currency recognized by any national government. Currencies by definition have to be generally accepted and in use. Right now there is too much contention to truly be a currency. Germany recognizes Bitcoins as a legal form of tender, but that is more about tax issues for Bitcoin transactions. However, just because it isn’t recognized as currency, or outright stated to not be legal tender as in China’s opinion, doesn’t mean it it’s not valuable.
It holds the same weight that a commodity might, perhaps a little more if you consider its value as a peer-to-peer payment system. People want bitcoins. Prominent investors like the Winklevoss twins and Sir Richard Branson had talked openly about their support of bitcoin, and the list of merchants that are accepting bitcoin for goods is rising on the daily value. So while currently there is no consensus on what bitcoin is, it is still valuable and governments are taking notice.
2. Bitcoin is a Ponzi scheme
The words Ponzi scheme get thrown around fairly often when people talk about bitcoin. For the record, a Ponzi scheme is when someone intentionally defrauds investors, paying initial investment returns from the new investor money; Jack pays John with Jim’s money. Bitcoin is not such a scheme. Money is made through several different ways, most notably in a buy-low, sell-high stock-like technique. Since bitcoin is completely decentralized, there's no one specificly defrauding people.
3. Bitcoin is destined to soar/sour
The value of bitcoin is highly speculated, but no one would have guessed at the beginning of last year that the value would skyrocket as much as it did. Now economists are paying more attention to the cryptocurrency than ever before. Cameron Winklevoss recently stated that he believes the price will eventually rise to $40,000 per bitcoin, meaning there is huge potential for the price to soar. However, just because heavy investors think it will rise doesn’t means it will, after all the Winklevoss twins bought into Bitcoin on the day before a huge crash in April. Some believe that the price is already overinflated and crashes like the April 11 crash or the one on Dec. 5 are imminent. Truth be told, both could and probably will happen. The value of Bitcoin is set by those who are buying and is subject to the market. That makes for a highly volatile currency with a perceivably rocky future. As it stands, no one really knows where it will go from here, so it is going to be a gamble for investors.
4. It’s easy to make money with bitcoin
Following along the same lines as the No. 3 myth, bitcoin’s volatility means the money making potential is anything but easy. Short-term investments might net some profits, but unless you have high amounts of liquid capital to invest, long-term growth is more likely a better plan for you. Long-term investment plans are better suited for markets that have a greater history of growth than bitcoin currently has. The rapid rise only started to take place in the last two months. Most of last year the value bounced between $90 and $250. Bitcoin mining has also gotten exponentially harder. The hash rate, the algorithm used to make bitcoins, now requires specialty hardware to mine. But as bitcoin made headlines, specialty graphics card production couldn’t keep up with the demand and now there are shortages. Nothing about mining is easy.
5. Bitcoin is used for terrorists and drug cartels
Perhaps the most talked-about headline last year that pushed bitcoin into the spotlight was the closure of the Silk Road, a digital black market. The anonymity of bitcoin and the lack of a centralized banking system was attractive for the Silk Road patrons. But when the Silk Road was shut down, bitcoin survived, leading many to believe that the connection between the two was overstated. While some still believe in a connection between illicit activities and bitcoin, the very real connection between valid establishments and bitcoin is on the rise. Every day merchants add the ability to accept bitcoins as tender, showing that it is better used for good than for bad.